Top investor sees U.S. property crash

[Gordon Gekko]

Wed Mar 14, 2007 12:59PM EDT

By Elif Kaban

MOSCOW (Reuters) - Commodities investment guru Jim Rogers stepped into the U.S. subprime fray on Wednesday, predicting a real estate crash that would trigger defaults and spread contagion to emerging markets.

"You can't believe how bad it's going to get before it gets any better," the prominent U.S. fund manager told Reuters by telephone from New York.

"It's going to be a disaster for many people who don't have a clue about what happens when a real estate bubble pops.

"It is going to be a huge mess," said Rogers, who has put his $15 million belle epoque mansion on Manhattan's Upper West Side on the market and is planning to move to Asia.

Worries about losses in the U.S. mortgage market have sent stock prices falling in Asia and Europe, with shares in financial services companies falling the most.

Some investors fear the problems of lenders who make subprime loans to people with weak credit histories are spreading to mainstream financial firms and will worsen the U.S. housing slowdown.

"Real estate prices will go down 40-50 percent in bubble areas. There will be massive defaults. This time it'll be worse because we haven't had this kind of speculative buying in U.S. history," Rogers said.

"When markets turn from bubble to reality, a lot of people get burned."

The fund manager, who co-founded the Quantum Fund with billionaire investor George Soros in the 1970s and has focused on commodities since 1998, said the crisis would spread to emerging markets which he said now faced a prolonged bear run.

"When you have a financial crisis, it reverberates in other financial markets, especially in those with speculative excess," he said.

"Right now, there is huge speculative excess in emerging markets around the world. There will be a lot of money coming out of emerging markets.

"I've sold out of emerging markets except for China," said Rogers, long a prominent China bull.

Even in China, the world's fastest expanding economy, Rogers said stocks were overvalued and could go down 30-40 percent.

But he added: "China is one of the few countries in the world where I'm willing to sit out a 30-40 percent decline."

The last stock market bubble to burst was the dot-com craze which sparked a crash from March 2000 to October 2002.

When the last bubble burst in Japan, said Rogers, stock prices went down 85 percent despite the country's high savings rate and huge balance of payment surplus.

"This is the end of the liquidity party," said Rogers. "Some emerging markets will go down 80 percent, some will go down 50 percent. Some will most probably collapse."

[25]

Let me see if I understood this correctly; The real estate market is about to come back down to earth and a bunch of cynical dipshits with too much money are going to lose a fortune as the value of their "investment" plummets? And banks will get reamed by defaults on the inflated mortgages? 

How sad.

Will this cause a total disaster in the finance market in general? Will Wall Street take it right in the ass? That would be the saddest part, because the financiers and stock-brokers and such will have to find a new building to throw themselves from the top of this time. 9/11 changed everything. 




That was mean. I feel bad now.



Okay, it passed.

[SLCPUNK]

Sub prime took it in the ass this week, that's for sure.

Bigtime.

[The Dog]

Let me see if I understood this correctly; The real estate market is about to come back down to earth and a bunch of cynical dipshits with too much money are going to lose a fortune as the value of their "investment" plummets? And banks will get reamed by defaults on the inflated mortgages? 

How sad.

Yeah, I have to agree with you here (assuming you were being sarcastic hehe).  Living in NYC and seeing the housing market sky rocket to ridiculous heights really was just insane.  The middle class got totally squeezed out while the rich got richer and the poor got poorer (or the somewhat middle class got completely broke from having to spend 500,000+ on a house that cost 250,000 about 6 years ago).

I don't feel bad at all.  Infact I hope I can buy a foreclosed property dirt cheap

[SLCPUNK]

You may very well get your wish. It's foreclosure city on the horizon, and we're already off to a running start down here in Florida. It's going to be ugly for a long time. Of course realtors are saying we're at the bottom now, but they are full of shit.

I don't agree with this as an instance of "rich getting richer". People are getting the shaft at all economic levels in this bubble.

[Gordon Gekko]

I don't think we are seeing "corrections" in an overvalued market, we are seeing events in underlying fundamentals. Economies based on inflated paper values, like the 1920's market based on inflated stock prices and this one built on puffed up real estate values, crash hard because everyone starts floating loans on puffed up paper.

We have yet to produce a sustainable market because we do nothing to move the US towards a sustainable economy based on the production of real wealth. The whole thing is a house of cards. This time around, as millions of home owners get their ARMs twisted while the collateral for their loans evaporates in a flurry of bank failures, we are going for a real ride.

I don't agree with this as an instance of "rich getting richer". People are getting the shaft at all economic levels in this bubble.

Actually, I've made a lot of money betting against the Bush economy.

How you doing right now?

[sandman]

On the House | Mortgage refinancing boom may be on horizon

By Al Heavens
Inquirer Columnist

Brace yourself, my friends. A mortgage-refinancing boom could be around the corner. That's the opinion of an increasing number of lenders, at least.

"Stock market problems, talk of recession, and the 'flight to quality' " - investors dumping money into safe, though lower-yielding, Treasury bonds - "all point that way," said Fred Glick, president of USLoans L.L.C. in Philadelphia.

The long-term, 30-year fixed-rate roller-coaster is headed downward, observers say.

"Interest rates have been falling substantially since late January, making refinancing more desirable," said Bob Walters, chief economist for Quicken Loans.

Long-term rates have been hovering at 6.15 percent for more than a month and aren't expected to venture too far from that spot.

"We do not foresee significant movements in mortgage rates, with rates on 30-year fixed-rate mortgages averaging between 6.3 and 6.4 percent for the remainder of the year," said Freddie Mac chief economist Frank Nothaft.

Who will want to refinance?

"The rush of folks who are facing ARM adjustments and, therefore, moving to the safety of a fixed rate is significant," said Walters.

About $1.1 trillion in adjustable-rate mortgages are scheduled to refinance in 2007 alone, according to the Mortgage Bankers Association of America.

But will it be a boom akin to the one in fall 1993, when long-term rates fell below 7 percent for the first time since 1980, or the one in 2001, when equally low rates led re-fis to comprise three-quarters of all mortgage originations?

"Re-fi boom?" asked Walters. "Tough to say. A 'boomlet' is under way right now."

Said Jim Svinth, chief economist at LendingTree.com: "For folks with reasonably good credit and equity in their home, this is as good a time as any to shift from an adjustable product to a fixed-rate product.

"I believe some of the unsettling news lately in the financial markets inspired consumers to think about their own financial situation, and many made a move last week, as reflected in the refinance statistics," Svinth said.

He was referring to the week ending March 2, when the refinance share of mortgage activity increased to 46.1 percent of total applications from 43.2 percent the previous week, according to the Mortgage Bankers Association.

That's not three-quarters of all originations, but, yes, it probably could be defined as a "boomlet."

In 1993, with lots of borrowers running to refinance, the mortgage system almost ground to a halt. That didn't happen in 2001, because by then the process had been computerized enough to keep things moving rapidly.

I've refinanced only twice - once in 1994 and again in 2003 (different mortgages and houses).

The second time was to convert a 6.25 percent hybrid (I think it was a 5/1) to a 5.375 percent fixed. I was on the phone to my broker just about every two days in the six months between the ARM and the fixed-rate mortgage, asking if it was time yet. (Now, if I could only negotiate a lower property-tax rate with the borough.)

From the National Association of Mortgage Brokers comes this caveat: Be aware of all the fees and closing costs you will incur - refinancing is not free. Ask for a written list of the costs.

Who should refinance? Walters recommends it for:

Anyone who has a fixed rate and can lower it. If you can do a "no cost" refinance, then simply dropping your rate by one-eighth of a percentage point makes sense.

Anyone facing an ARM adjustment in the next 18 months.

Anyone who has improved his or her credit profile, to take advantage of the lower rate that can be achieved in a better credit program.

Anyone whose home has increased in value and who has mortgage insurance should refinance to remove that insurance.

Anyone who has significant amounts of other, expensive debt, to lower their total borrower costs - for example, credit- card debt carrying interest rates in the high teens to low 20s.

If you don't have to wait to refinance, don't. And be sure to shop for the best deal.

[sandman]

The Subprime Mortgage Scare
The Economy | Consequences may easily reach beyond those with high-risk loans

By Andrew Cassel
Inquirer Columnist

As the poet once said, no market is an island.

We saw that in the late 1990s, when currency turmoil in Thailand and Indonesia rippled throughout Asia and around the world, eventually leading to defaults in Russia and the collapse of some then-mighty U.S. hedge funds.

Similarly, when dot-coms imploded in 2000, the damage wasn't limited to software- or microchip-makers. Lots of low- to medium-tech firms got caught in the downdraft, and the overall economy went into a nine-month recession.

Now the subprime-mortgage market is in trouble. Foreclosures are rising, particularly among people who took out "creative" home loans during 2005 and 2006, near the peak of the real estate price surge.

Many of those loans offered artificially low (but temporary) "teaser" rates; others (nicknamed "liar's loans") required no proof of the borrower's income. Some were designed for people who expected to buy and flip a property within a year or two.

But the end of the boom threw a monkey wrench into many of those deals, leaving thousands of homeowners with an insoluble problem.

Facing unaffordable monthly payment increases, they now may owe more than the house is worth, which also means they cannot sell or refinance without putting up additional money.

Lenders are hurting as well. Many hold baskets of delinquent or late-paying mortgages on properties all over the country.

Their choices: Either sell off the loans at a steep discount (assuming anyone will buy them) or begin long and costly foreclosures that could put loads of vacant real estate back on an already weak market.

It's a mess, in short. But if you're not one of those troubled borrowers or lenders, should you care?

After all, most of us didn't buy our homes at inflated boom-time prices. Most of us have manageable mortgages or even own our homes free and clear.

And most of us didn't invest in those exotic mortgage-backed securities that Wall Street created to fund the home-loan boom.

So we're OK, right? Well, maybe. But consider:

Most real estate sales are part of a chain: The buyer of a starter home makes it possible for the seller of that home to move up, buying someone else's house so he can move up as well. Trouble in the market's low end can ripple upward fairly quickly.

The subprime meltdown already has brought government scrutiny, including probes into possible criminal activity, and also calls for tighter regulation of home lending in general. If new rules make it harder to push easy credit, they will by definition also make it harder (at least for some) to obtain a mortgage. That's likely to slow sales and curb price appreciation as well.

Slow home sales mean less construction work, fewer sales of appliances and furniture, and fewer jobs in all of the industries that depend on housing. Unless other sectors grow faster to compensate, the losses would subtract from the economy's overall growth rate.

Maybe the scariest possibility was mentioned in a report out of Dallas. A local public-employee pension fund there had invested in those subprime-mortgage bonds as a way of generating the high returns it needed to meet its liabilities to retirees.

If that sort of thing turns out to be widespread, a lot of local governments could end up having to turn elsewhere to make up the losses. Taxpayers could discover they're on the hook for more than they thought.

None of this is to say we're headed for an economic disaster because of the mortgage mess. Indeed, even economists who believe housing will slow the economy down this year don't think it'll get bad enough to tip us into recession.

But some, including Alan Greenspan, the former Federal Reserve chairman, are now talking about mortgages as more than a casual worry. Greenspan told a stockbrokers' group last week that subprime loans are "not a small issue" for the economy.

And that could be putting it mildly.

[SLCPUNK]

Maybe the scariest possibility was mentioned in a report out of Dallas. A local public-employee pension fund there had invested in those subprime-mortgage bonds as a way of generating the high returns it needed to meet its liabilities to retirees.

Jesus!!!

[25]

Maybe the scariest possibility was mentioned in a report out of Dallas. A local public-employee pension fund there had invested in those subprime-mortgage bonds as a way of generating the high returns it needed to meet its liabilities to retirees.

Jesus!!!

Nothing screams "responsibility" like betting the pension fund on a crap-shoot.

[sandman]

so true. sounds like there could be another Enron situation with people losing all of their retirement funds. 

[pilferk]

Let me see if I understood this correctly; The real estate market is about to come back down to earth and a bunch of cynical dipshits with too much money are going to lose a fortune as the value of their "investment" plummets? And banks will get reamed by defaults on the inflated mortgages? 

How sad.

Yeah, I have to agree with you here (assuming you were being sarcastic hehe).  Living in NYC and seeing the housing market sky rocket to ridiculous heights really was just insane.  The middle class got totally squeezed out while the rich got richer and the poor got poorer (or the somewhat middle class got completely broke from having to spend 500,000+ on a house that cost 250,000 about 6 years ago).

I don't feel bad at all.  Infact I hope I can buy a foreclosed property dirt cheap

We were lucky...and smart.

We bought (well, started building) about 6 years ago in a market that's seen growth (35%-ish), but not the kind of growth that the major bubble markets have seen (100%+).

We also didn't overextend ourselves financially with our mortgage (staying well below the 30% of income "rule"), didn't go for one of those wacky "interest only" mortgages, and stuck with a fixed interest rate rather than gambling on a variable rate.

The bubble in those markets is going to "burst" (or level out) not based entirely on forclosures and defaults.  That's going to hurt, to be sure.  I think the larger factor is going to be because there's going to be little to no market for the houses at their current prices in those areas.  Foreclosures are actually going to really hurt the lending institutions, probably make credit harder to come by, and force the banks to sell the properties at a loss.  The THREAT, being publicized by the media, is also going to discourage potential homebuyers from doing some of the stupid (financailly) things potential homebuyers have been doing for the last 2 or 3 years....and have been making the lenders money hand over fist.

[sandman]

the sad part of all this is the low income families that within the last 2 years got sucked into a mortgage that they couldn't really afford and/or was just a bad deal.

and now they are faced with the reality that they need to get out, but their house is worth the same or slightly less, and they have no equity.

on the other end of the spectrum, there's people that had investments worth a million dollars on paper, borrowed against it to try to get rich quick, and are now paying the price. but i don't feel sorry for them, they knew the risks going in. and they'll survive just fine.

anyone that bought real estate prior to 2003 is damn lucky. i feel bad for people starting out today. 

[Cornell]

anyone that bought real estate prior to 2003 is damn lucky. i feel bad for people starting out today.?

That's so true - we refinanced our house in 2002 because the rate was less than 1/2 what we had at that time.  Our house payments dropped A LOT but we kept paying the same amount that we were used to paying and now almost 5 years later, our house is very close to paid off.  We have a decent size house too - 4 bedrooms, 4 bathrooms, 2 great rooms, a living room....  We were lucky in our timing. 

[The Dog]

the sad part of all this is the low income families that within the last 2 years got sucked into a mortgage that they couldn't really afford and/or was just a bad deal.

and now they are faced with the reality that they need to get out, but their house is worth the same or slightly less, and they have no equity.

on the other end of the spectrum, there's people that had investments worth a million dollars on paper, borrowed against it to try to get rich quick, and are now paying the price. but i don't feel sorry for them, they knew the risks going in. and they'll survive just fine.

anyone that bought real estate prior to 2003 is damn lucky. i feel bad for people starting out today. 

I SO wanted to buy back then....right after 9-11, costs for housing in and around NYC plummetted while the outer lying suburbs sky rocketed in price.  You could have bought a nice apt. downtown for pennies what you would pay today.  of course the economy SUCKED back then and I had no money and no job for part of 2001.   My friend bought an apt out on long island for 90k and sold it a year ago for almost 200k.  lucky bastard!

[SLCPUNK]

I have looked at 6 homes in the last week and a half. Four of those have been foreclosures and one was a short sale (pre-forclosure) that I think has still not gotten an offer, meaning it will be on the chopping block soon. The biggest thing I am seeing right now are investors (who were greedy) and bought 6-12 houses 12-18 months ago and can not sell them. They are trying to sell them for what they paid, which in many cases is still too high, and are stuck. I looked at one yesterday, and made a super lowball offer, which the "investor" scoffed at. Said he'd rather rent it then sell it at the price offered. Simple math tells me that he owes about 500-750 month after a renter pays, imagine that with 8 homes, and prices dropping.

This is my outlook if you want to buy a home to live in. While not all market/prices are going to plummet to 2001 levels, I believe 2001 level priced homes can be had. ARMs leading to financial hardship, investors who are getting crushed, short sales, and foreclosures, will leave open plenty of deals. I think we'll see this for a long time, and expect a recession to follow. My cheap .02 cents for what it's worth.